What is Quantitative Easing (QE)

and how does it work?

MBA35 Managerial Excellence

The firm and its environment Francesco Giavazzi



The economic crisis (notes on Quantitative Easing)
Mervyn King, Governor of the Bank of England, explains QE
The traditional Keynesian (IS-LM) model

investment: Inv = f ( i, Y) i , Inv ; Y , Inv

money market: money demand = f ( i, Y)
i , m
dem
; Y , m
dem


The Keynesian model when firms pay more than i

= i + x

I = I (Y, ) , Inv ; Y , Inv

x = x (capital of banks, capital of firms)
What happens when banks capital falls?
I = I (Y, ) = I (Y, i + x )

When banks capital , x and the IS shifts down

QE means that the central banks buys loans from
commercial banks paying either cash or TBills

QE brings, x and the IS back up

But QE may not be enough to avoid
the liquidity trap
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120
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360
07 08 09
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1
2
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07 08 09
Central banks and the crisis
Policy Rates
(in percent)
Central Banks Total Assets
(index, 1/5/2007=100)
Euro area
U.K.
Japan
Canada
U.S.
U.K.
Canada
Japan
Euro area
U.S.
Lehman
Brothers
4/17 4/21
The Fed and QE
QE has worked

a measure of x:
spread between corporate and Government bonds